Investment Funds Update: Europe- Issue 11, 2015
Dechert's investment funds update discusses the key legal and regulatory updates for the funds industry from the primary European asset management centres and fund domiciles.
Socially Responsible Investment in France
The Autorité des Marchés Financiers (“AMF”) published a report on the French market practice with respect to Socially Responsible Investment (“SRI”). The study focused on the information provided to investors in relation to SRI. Pursuant to this study, the AMF noticed that the information was diverse from one fund to another. The AMF has therefore updated two Position-Recommendations on (i) the drafting of marketing documents and marketing of French UCIs and (ii) drafting of the French UCIs’ legal documentation, in order to provide guidelines on how to include SRI information in such documents.
Market Timing and Late Trading
The AMF has amended its Position n° 2004-07 which aims at preventing market timing and late trading activities in view of (i) the implementation of the AIFM Directive in France and (ii) the future implementation of the Solvency II Directive in France. The goal of such modification is to allow the communication of the portfolio details to insurance companies in order for them to determine their prudential ratios.
French Markets Key Figures: Asset Management Companies’ Profitability
The AMF published on 30 November 2015 the key figures on the profitability of French asset management companies. The figures show a steady growth in the total turnover (11.8 billion to 12.5 billion) and in operating income (from 2.3 billion to 2.5 billion). The revenue of French asset management companies are mainly formed by management fees (almost 80% of the total revenue).
BaFin Issues Announcement on Fair Treatment of Investors
BaFin issued an announcement on the fair treatment of investors with regard to information on portfolio data on 13 November 2015. According to the German Investment Code (Kapitalanlagegesetzbuch, “KAGB”), German fund management companies are obliged to disclose data on the composition and the performance of their portfolios to investors at least once a year. However, this does not ensure compliance of certain institutional investors with their reporting obligations pursuant to Solvency II or other regulatory disclosure obligations. BaFin therefore announced that it is acceptable from a regulatory perspective for a fund management company to enter into side letters with those investors to ensure their compliance with their reporting obligations. However, BaFin claims it is not acceptable for UCITS or retail AIFs to give certain institutional investors a preferential treatment, whereas for Special AIFs, the preferential treatment of certain investors is permitted if the fund rules or the articles of association provide for the preferential treatment of certain investors (see section 26 (3) KAGB).
BaFin issues FAQ on German Act Implementing Transparency Directive Amending Directive 2013/50EU
The German provisions implementing the Transparency Directive Amending Directive 2013/50EU (“Transparenzrichtlinie-Änderungsrichtlinie-Umsetzungsgesetz“) are expected to enter into force on 27 November 2015. BaFin issued a FAQ On 28 October 2015 addressing the most important changes that the act will introduce. These changes include the reporting obligations regarding shares with voting rights held in issuers for which Germany is the home state, in particular a new mandatory disclosure form to be filed with BaFin and the issuer, new provisions on attributing voting rights and changes in filing obligations related to holdings of financial instruments.
Six Retail AIFs Registered in Germany in the Third Quarter of 2015
In the third quarter of 2015, the BaFin has approved six retail AIFs for marketing in Germany. The total fund volume amounts to 138 Million Euro, with private equity funds ranking at the top. During the first three quarters of 2015, the BaFin approved a total of 25 retail AIFs with overall equity of 704 Million Euro.
Investment Statistics as of 30 September 2015
In November 2015, the German Investment Fund Association BVI has issued its latest investment statistics report dated 30 September 2015, giving an overview of the net assets and net sales within the German investment fund and asset management markets. The statistics are broken down by asset class and provider. They provide information on net assets and net inflows of investment funds and assets outside investment funds.
Irish Funds Publishes CRS Self-Certification Forms
The Organisation for Economic Co-operation and Development (“OECD”) has established the Common Reporting Standards (“CRS”) framework based on the FATCA model,. Under CRS, from 1 January 2016, funds within participating jurisdictions will be required to identify and confirm the tax residence status of all new and existing investors. On 9 November 2015, Irish Funds published its self-certification form, which can be used at account opening stage, to fulfill the CRS requirements.
Central Bank Updates AIF Rulebook
The Central Bank of Ireland (the “Central Bank”) published the latest version of the Alternative Investment Funds (“AIF”) Rulebook (the “Rulebook”), on 4 November 2015. The Rulebook sets out the Central Bank's rules in relation to the operation of AIFs and their service providers.
Central Bank Publishes Updated AIFMD Q&A
The Central Bank published a seventeenth edition of the Alternative Investment Funds Management Directive (“AIFMD”) Q&A guidance document (the “Q&A”) on 4 November 2015. The revised Q&A provides guidance on what requirements apply to Qualified Alternative Investment Funds with non-EU Alternative Investment Fund Managers during the transition period and clarifies that there is no regulatory obstacle to holding subscription and redemption monies being held within a single account in the name of an umbrella fund.
Central Bank Management Feedback Statement and Guidance (CP86)
The Central Bank published its feedback statement on CP86: Fund Management Company Boards (the “Feedback Statement”) and related Guidance on Fund Management Companies (the “Guidance”), on 4 November 2015. The Feedback Statement focuses on two areas, firstly, the authorisation process where the quality of the boards and internal arrangements of fund management companies are scrutinised and secondly, the day-to-day process of guiding and overseeing the administration and investment of the monies invested with investment funds. The Guidance provides detailed information on delegate oversight, organisational effectiveness and directors time commitments.
Update to Central Bank Prospectus Handbook
The Central Bank's Prospectus Handbook (the “Handbook”) was updated effective 2 November 2015. The Handbook is relevant for issuers of transferable securities which are subject to Directive 2003/71/EC (the Prospectus Directive) and certain service providers to those issuers.
UCITS Updates Issues
The Central Bank issued revised UCITS guidance in respect of Permitted Markets and UCITS FDI and EPM on 4 November 2015. The relevant revisions are in Paragraph 1 of the Guidance on Permitted Markets and revisions to paragraphs 126-128 of the UCITS FDI and EMP Guidance.On the same date the Central Bank published the Ninth Edition of the UCITS Q&A.
CP97: Investment Firm Regulations
The Central Bank of Ireland issued a Consultation Paper on 4 November 2015 regarding proposed regulations to apply to certain Investment Firms. This Consultation is open until 27 January 2016.
CSSF Press Release 15/49 Relating to the New Transparency Requirements for Issuers of Securities and Notifications of Major Holdings
In press release 15/49, the CSSF provides clarifications in relation to the provisions of Directive 2013/50/EU, which introduces amendments to Directive 2004/109/EC on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market, transposed into Luxembourg law by the law of 11 January 2008 on transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market. The press release relates to the publication of regulated information and provides details in relation to the determination of the home member state and notifications of major holdings.
CSSF Overview of Undertakings for Collective Investment and Specialized Investment Funds at the End of October 2015
The CSSF’s press release 15/50 contains an overview of undertakings for collective investment and specialized investment funds at the end of October 2015. The overview relates to (i) the global situation, which covers the evolution of undertakings for collective investment (UCI) with shares in the month of October 2015, the evolution of fixed income UCIs in October 2015, diversified UCIs and fund of funds in the month of October 2015 and (ii) information in relation to the number and net assets of part I and part II UCIs of the Luxembourg law of 2010 relating to undertakings for collective investment and SIFs under the law of 2007 relating to specialized investment funds.
CSSF Regulation 15-03 in Relation to Marketing of Alternative Investment Funds
CSSF regulation 15-03 in relation to article 46 of the law of 12 July 2013 on alternative investment fund managers lays down detailed rules for the application of article 46 of the law of 12 July 2013 on alternative investment fund managers regarding the marketing of foreign alternative investment funds to retail investors in Luxembourg.
CSSF Newsletter for November 2015
The CSSF published its November 2015 newsletter (number 178), which contains a summary of recent national regulation and statistics.
UK Tax – Changes to Taxation of Asset Manager Performance-Based Rewards
In his Autumn Statement delivered to Parliament on 25 November 2015, the Chancellor of the Exchequer announced that:
“The government will introduce legislation to determine when performance awards received by asset managers will be taxed as income or capital gains. An award will be subject to income tax, unless the underlying fund undertakes long term investment activity.”
Formal proposals for these changes will be introduced in the Spring in the Finance Bill 2016.
FCA launches Asset Management Market Study
The FCA launched its study into competition in the UK asset management industry on 18 November 2015 and published the terms of reference for the study.
The aim of the study is to examine whether competition is working effectively in the asset management sector to enable both retail and institutional investors to obtain value for money when purchasing asset management services.
The study’s main areas of focus will be:
- How asset managers compete to deliver value.
- Whether asset managers are motivated and able to control costs along the value chain; and
- What effect investment consultants have on competition for institutional asset management.
The regulator will also look at whether there are any barriers to innovation and/or technological advances in asset management.
Both retail and institutional investors will be taken into consideration.
The FCA invited submissions on the topics raised in the terms of reference by 18 December 2015. It intends to publish its interim report in summer 2016 with a final report in early 2017.
FCA Announces New UK Debt Market Forum
The FCA’s Acting Chief Executive, Tracy McDermott, announced on 3 November 2015 that the FCA would be creating and chairing a UK Debt Market Forum.
The announcement was mentioned in the context of the European Commission's action plan for capital markets union (CMU), and the need to assess the UK domestic market to ensure that it is able to support the wider aims of CMU.
According to Ms McDermott, the FCA is keen to explore, alongside industry, the effectiveness of the UK's primary markets. The forum would bring together a broad range of parties including industry, government and the FCA, and will look for practical measures to enhance primary debt markets in the UK.
HM Treasury Names High-Risk Jurisdictions for Money Laundering
HM Treasury issued an advisory notice on 23 October 2015 that UK entities subject to the Money Laundering Regulations 2007 should:
Consider the following jurisdictions to be high risk for the purposes of the Money Laundering Regulations 2007 and should apply enhanced due diligence measures in accordance with the risks:
- The Democratic People's Republic of Korea,
- Iran, and
Take appropriate actions in relation to the following jurisdictions to minimise the associated risks, which may include enhanced due diligence measures in high risk situations:
- Bosnia and Herzegovina,
- Lao PDR,
- Papua New Guinea,
- Uganda, and
The advisory notice followed two statements of the Financial Action Task Force, which were annexed to the advisory notice.
HM Treasury Publishes Draft Technical Legislative Amendments for UCITS V
HM Treasury published a consultation on 23 October 2015, including a draft statutory instrument, on technical changes to the Financial Services and Markets Act 2000 and subordinate legislation required to implement UCITS V. The consultation closes on 17 December 2015.
EUROPEAN UNION LEGAL DEVELOPMENTS
EMIR – CCP List Updated and Equivalence Decisions Reached, Central Clearing for Norwegian, Polish and Swedish Interest Rate swaps, Though no Exemption for Collateralisation of Bank Guarantees for Energy Derivative
Updated CCP List
ESMA updated its list of authorised CCPs, adding CME Clearing Europe on 4 November 2015.
The European Commission adopted equivalence decisions for CCPs in Canada, Switzerland, South Africa, Mexico and the Republic of Korea on 13 November 2015, meaning market participants will be able to use them to clear standardised over-the-counter derivative trades, while these CCPs will remain subject solely to the regulation and supervision of their home jurisdictions.
Interest Rate Swap Clearing
ESMA published its final report setting out draft technical standards for clearing Norwegian, Polish and Swedish interest rate swaps on 10 November 2015, meaning that central clearing for interest rate swaps in those currencies is expected to start in Q2 2016.
Read the press release 'ESMA Proposes Central Clearing for Norwegian, Polish and Swedish Interest Rate Swaps'
Non-Collateralised Bank Gurantees
ESMA confirmed that it will not extend the existing grace period of three years for non-financial firms’ use of non-collateralised bank guarantees to cover transactions in energy derivatives cleared by European CCPs on 19 November 2015.
Read the press release 'ESMA Will Not Exempt the Collateralisation of Bank Guarantees for Energy Derivatives Under EMIR'
Capital Markets Union – Further Endorsement from European Council
On 10 November, the European Council formally endorsed the European Commission’s action plan on building a Capital Markets Union.
MiFID II Implementation
Steven Maijoor, ESMA chair, confirmed to the European Parliament on 10 November 2015 that he had raised with the European Commission whether uncertainty over the content of MiFID II’s regulatory technical standard would need a legislative response delaying certain parts of MIFID II, mainly related to transparency, transaction and position reporting.
Read the press release 'ESMA Chair's Statement to the ECON Committee Scrutiny Hearing on MiFID II'
ESMA published its correspondence with the European Commission on 17 November 2015, highlighting its concerns regarding meeting the MiFID II implementation date of 3 January 2017, specifically in respect of reference data, transaction reporting, transparency parameters and position reporting.
The European Parliament issued a press release on 27 November 2015, confirming that it had informed the European Commission that it would be willing to accept a one-year delay of the entry into force of MiFID II. The position on a delay is expected to be clarified mid December.
Indirect Clearing Consultation
ESMA launched a consultation on indirect clearing arrangements under EMIR and MiFIR on 5 November 2015. Indirect clearing is in practice understood as when clients of a clearing member sign up clients of their own.
ESMA’s draft rules cover arrangements for OTC derivatives and exchange-traded derivatives.
Read the press release 'ESMA Consults on Indirect Clearing Arrangements'
Complex Debt Instruments and Structured Deposits Under MiFID II
ESMA published its final report on guidelines on complex debt instruments and structured deposits under MiFID II on 26 November 2015.
Read the press release 'ESMA Publishes Final Report on Guidelines on Complex Debt Instruments and Structured Deposits in MiFID II'
Other EU Developments – Deal Reached on Benchmark Regulation and Revisions to Prospectus Directive
The European Commission and the Luxembourg Presidency reached agreement with the European Parliament on the Benchmarks Regulation on 25 November 2015. A benchmark is an index or indicator used to price financial instruments and financial contracts or to measure the performance of an investment fund.
The new rules will reduce the risk of manipulation by ensuring that benchmark providers in the EU have prior authorisation and are subject to proper supervision.
The European Commission confirmed on November 30 2015, the intention to revise the Prospectus Directive to exempt smaller capital raisings and creating a lighter prospectus for smaller companies.